Rules of the Game: Cranking Out the Green

When you hold investments longer than you might for a technical trade, fundamental screening criteria become more important. Too often, investors only look at price-to-earnings ratio, and neglect to dig deeper in to the company's ability to generate cash.

But, for my own analysis, when I'm scouring for large- and mid-caps -- stocks I'm most likely to evaluate for a long-term holding -- one of my regular screens focuses on free cash flow per share. I look for recent growth, and then I check those numbers against the company's earnings performance and the stock chart.

Last week, I noted that Baidu (BIDU) -- which showed up on my large-cap emerging-market screen -- was lacking when it came to chart performance. Still, its cash flow per share increased in each of the past four years, coming in at $2.64 most recently.

Baidu's earnings-per-share growth has also been impressive, with income rising 62% or more in each of the past eight quarters. That growth has been decelerating, but that's not surprising to see as a company matures. Projected growth rates are not exactly worrisome, either: When Baidu reports 2012 results, analysts expect earnings of $4.77 per share, up 57% vs. 2011 results. This year, the Street sees income of $5.94 per share, which would mark a gain of another 24%.

As I mentioned, Baidu's chart leaves much to be desired. The 50-day moving average is below the 200-day line -- not an ideal situation. Watch for a crossover to reverse that situation, as that could be bullish development.

Another large-cap with solid cash-flow growth is defense contractor General Dynamics (GD), which saw free cash flow per share grow from $6.33 to $7.46 in the past two years. This stock, unlike many others, has been unable to regain its 2008 high.

Although annual earnings increased in each of the past six years, General Dynamics growth has stalled in the past two quarters, with dips of 1% and 7%. For that reason, and because the stock has been a lackluster technical performer, this is not one I've actively tracked.

There are some obvious pros and cons with General Dynamics. On the negative side, for instance, defense-spending cuts are something to be concerned about here. However, the company has done a good job returning capital to shareholders, as its dividends per share are growing -- current yield is 2.9%.

The company is due to report fourth-quarter and full-year results Wednesday before the open. For 2012, earnings are expected to come in at $6.96 per share, just $0.02 above EPS for all of 2011.

Finally, I wanted to point out a stock I've written about extensively as large-cap growth leader: Alexion Pharmaceuticals (ALXN), which also made it onto my free-cash-flow screen. The company's drug Soliris, which treats two very rare blood disorders, has been notching double-digit sales growth. Of course, that pace can be difficult to sustain, but Wall Street expects the company to earn $2.05 per share. That would be a 49% gain from a year prior.

The chart has been muddling along since the price fell to $86.20 in November, and its 50-day average is below the 200-day. However, it may be soon poised to cross above the longer-term line.

That aside, Alexion's free cash flow per share has grown from $0.03 to $1.30 in the past three years. That's in addition to sales growth -- revenue rose 41% or higher in the past eight quarters as earnings increased by 45% or more.

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